Charity Used to Scam Senior Citizens Loses IRS Exemption

New IRS ruling PLR 201620015 is an excellent reminder of two things: First, scammers are out there preying on the elderly and using the name of charity to do it. Second, the PLR makes it clear that the income tax exemption for charities is all about giving and not about taking.

Republished with permission from LISI Charitable Planning Newsletter #250 (June 16, 2016) at http://www.leimbergservices.com

EXECUTIVE SUMMARY:

A so-called charitable organization was formed – ostensibly to help senior citizens. But after concluding that it made false and misleading statements on its exemption application to hide the fact that its officers tried to enrich themselves through a trust mill scam to sell worthless trusts and "personal annuities" to senior citizens, the IRS revoked the organization’s exempt status.  And the scammers could ultimately serve time.

On the basis of the examination of the books, records, and activities of and the interviews, the IRS held that the organization failed to qualify for exempt status under Code Section 501(c)(3). Admissions made during the interviews with officers and the organization’s accountants showed that the officers of the organization were essentially salesmen running a "trust mill" operation. The Service found they intentionally made deliberately false and preplanned misleading statements when filing to obtain exempt status. Among these misstatements were knowingly material misrepresentations stating that several local attorneys were members of the “charity’s” board of directors – knowing that they were not and signed those misrepresentations under a "penalties of perjury" declaration.  They were selling sell worthless trusts and "personal annuities" to senior citizens to enrich themselves and never returned the proceeds to the senior citizens who invested funds in the "trusts."

FACTS:

Here, the purported charitable organization filed Articles of Incorporation stating that it was organized exclusively for charitable purposes and that the specific objectives and purposes of the corporation were to assist seniors with their independent living, charitable giving and ability to live their own lives with respect and dignity. It stated it planned to accomplish its objectives by:

· Providing counseling, planning, transportation, and funding to seniors on a case by case basis.

· Building wheelchair access ramps leading into the home.

· Installation of safety railings within bathtub or shower areas.

· Making adjustments to kitchen and bathroom countertops to make them more easily accessible to seniors.

It claimed it would derive financial support through "Contributions, benefits."

It claimed most of its officers and board would receive no compensation.

But the facts were far different than the organization had stated:

Upon contacting several attorneys listed as being members of the “charity’s” board, the Deputy District Attorney was advised that they were not then, nor had they ever been board members and they expressed surprise that they were listed them as board members. They stated they had never attended any meetings for the board members, officers, directors, or trustees.

Numerous complaints were filed by elderly residents who claimed they were sold worthless living trusts and fraudulent annuities.

The investigation by the local police and District Attorney's Office revealed that the officers and co-conspirators of the “charity” were operating a "trust mill scam" to sell elderly residents worthless living trusts and fraudulent annuities. They were representing to elderly victims that the granted 501(c)(3) status proved that they represented a legitimate charitable organization.

Obviously, the local police didn’t agree.  The officers and another individual  identified as a member of the organization’s Board of Directors and in charge of marketing were arrested by the Sheriff's Office for selling elderly residents worthless living trusts and fraudulent annuities through their companies. All the defendants have been bound over for felony trial.

The annuity agreements they sold to elderly clients essentially stated that interest on the client's investment would accrue in the client's account until death when the balance and principal would revert to the “charity.” They intended to fool the elderly clients into signing the agreements without the clients realizing what they were signing, and did not provide the clients with copies of the separate one page agreements.

Their intention was to deceitfully keep the clients’ monies after the clients’ deaths and if any heirs made a claim to the invested money after death, they would then simply state the clients intended their investments to be donations to their charity.  They admitted that they never intended for the individual clients, or the clients’  heirs, to get the annuity money back.

They copied an Insurance Company Annuity booklet, almost word for word, to use as the annuity contract booklet. They would purposely not have clients complete any application form, nor would they sign the booklet as  representatives or officers. They admitted they knew the “annuities” were not in compliance with the law and they hoped they would not get caught.  There was no insurance company behind the annuity and no financial backup reserves.

The “charity” received 100% of its income from the updating of fraudulent trusts and selling fraudulent private annuities to senior citizens.

COMMENT: 

TO BE TAX EXEMPT:

To achieve and retain 501(c)(3) exempt status, an organization must operate  exclusively for charitable, educational, or other enumerated exempt purposes.

If an organization is not engaged primarily in activities which accomplish charitable, educational or other exempt purposes, and the organization furthers non-exempt purposes, contributions will not be deductible.

A charitable organization is a corporation, trust, or community chest, fund, or foundation that is organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals.

An organization will not be regarded as a tax-exempt charity if more than an insubstantial part of its activities is not in furtherance of an exempt purpose. In fact, the very existence of a substantial nonexempt purpose, regardless of the number or importance of exempt purposes, will cause failure of the operational test.

Note: The operational test cannot be met if any part of the organization’ s earnings inure to the benefit of private shareholders or individuals, and where the organization serves a private benefit rather than public interests.  The Regulations (1.501(c)(3)-1(d)(ii)) make it clear that an organization is not organized or operated exclusively for one or more exempt purposes unless it serves a public rather than private interest. Thus, it is necessary for an organization to establish that is not organized or operated for the benefit of private interests such as designated individuals, the creator or his family, shareholders of the organization, or persons controlled, directly or indirectly, by such private interests. Prohibited private interests include those of unrelated third parties as well as insiders.

One more time: The presence of a single substantial nonexempt purpose can destroy the exemption regardless of the number or importance of exempt purposes.

So when an organization operates for the benefit of private interests, such as designated individuals, the creator or his family, or persons directly or indirectly controlled by such private interests, the organization by definition does not operate exclusively for exempt purposes.

To determine whether an organization’ s activities are consistent with the objectives of the 501(c)(3) exemption, the Service will use a three-part test. The organization's activities will be considered permissible if:

(1)  The purpose of the organization is charitable;

(2)  The activities are not illegal, contrary to a clearly defined and established public policy, or in conflict with express statutory restrictions; and

(3)  The activities are in furtherance of the organization's exempt purpose and are reasonably related to the accomplishment of that purpose.

TRUSTS MUST NOT BE CREATED TO SERVE ILLEGAL PURPOSES:

No trust can be created for a purpose which is illegal. The purpose is illegal if the trust property is to be used for an object which is in violation of the criminal law, or if the trust tends to induce the commission of crime, or if the accomplishment of the purpose is otherwise against public policy. This means all charitable trusts (and by implication all charitable organizations, regardless of their form) are subject to the requirement that their purposes may not be illegal or contrary to public policy.  The purpose of a trust is illegal if the trust property is to be used for an object which is in violation of the criminal law.

LISI Charitable Planning Newsletter #250 (June 16, 2016) at http://www.leimbergservices.com Copyright 2016 Leimberg Information Services, Inc. (LISI).  Reproduction in Any Form or Forwarding to Any Person Prohibited – Without Express Permission.

 

Popular

More Articles

Popular